American historian David Potter’s book People of Plenty argued that resource abundance shaped the American attitude towards possibility and opportunity. Abundant resources set the stage for wealth accumulation and created a society that believes that everyone can become rich through their own work and effort and that initiative and opportunity are the key to social mobility and success.
In Canada, we also have a tradition of resource abundance but it has generated not so much an ethos of aggressive individualism but also one of more government involvement in the economy particularly in the role of transport infrastructure to access resources and promote development. As well, the resource rents from natural resources have played a role in government finance whether it was late nineteenth century Ontario’s forest sector (which generated at its peak 20-25 percent of provincial government revenues) or energy in Alberta and Newfoundland and Labrador today.
As Herb Emery and Ron Kneebone have recently written in Alberta’s Problems of Plenty (May 2011, Policy Options), in the Alberta context the main role of resource abundance and resource rents has been to augment both private and public consumption. Emery and Kneebone detail how the heavy reliance on resource exploitation carried with it the problem of large swings in economic activity – boom and bust – which can play havoc with health and education spending if short-term resource revenues are funding unsustainable increases in program spending. They argue that the long-term solution to this problem is to redirect revenues from natural resource rents away from current government operating budgets and into savings. This would build endowments that would fund spending in the future in a stable pattern pointing to the successful employment of this approach by energy rich Norway. Alberta has only saved about 10 percent of the natural resource revenue it has collected whereas Norway has saved over 90 percent.
Such a policy appears to have eluded not only Alberta, but indeed, most Canadians who at various points in their history have been the beneficiaries of major resource booms. Why we have been unable to save and invest a larger share of our natural resource rents over the last century is an interesting question. Given that personal saving rates have also declined over the last two decades, do Canadians in general simply have a high rate of time preference? However, we used to have higher personal saving rates before. Could it be Canadians preferred the benefits of natural resource revenues to accrue to current consumption so that they could save more privately? Perhaps the best way to save and invest resource rents is to dedicate the endowment fund for a particular purpose. We may be averse to simply stockpiling resource revenues into a general fund that sits there as a giant temptation to opportunistic politicians down the road. Why not create dedicated public endowments out of natural resource revenues to generate future streams of income for particular functions– like one for health care, one for education, etc… In the case of health care, this could be a form of pre-funding health expenditure. Provinces like Alberta, Saskatchewan and Newfoundland & Labrador are certainly well positioned to try this out.
Worthwhile Canadian Initiative 
Good points, and thank you for the post.
Regarding the article, I’m glad they make mention of Ralph Bucks and the elimination of health care premiums, but I wouldn’t necessarily label them as moves based on ‘optimism in the face of falling energy revenues’. More like ‘let’s make politically expedient moves’ — most people can’t argue against government putting money in their wallets, even if they have a low time preference.
Sadly, I don’t your suggestions will pan out. The Parkland Institute, among others, has flogged this issue to death — the PC party does little fiscally that makes any sense (see also Flat Tax, ignoring findings of the Alberta Royalty Review, etc).
Compare Canada’s experience to savings rates in value-add export countries like China, Japan, and Germany, all with high savings rates. Do Canadians simply not feel the need to save due to future job prospects and stability of their investment holdings? I thought Alberta resident savings rates were relatively high…
What’s insufferable is that many residents of these areas seem to think their ability to collect and consume these rents is some sign of fiscal and moral rectitude on their part. I know Coyne dislikes the idea of sovereign wealth funds to save these resource rents for posterity, but his argument rests on the assumption that private savings will fill the gap left by the failure of governments to save these rents. Is there any evidence that savings rates are higher in provinces that experience resource booms, or does the increased income go predominantly to consumption?
Andrew F
Anecdotal evidence: from what I witnessed in northern Québec mines, there is a large consumption of high-value-added-by-volume goods with low transport costs. Balance of payments must be balanced so it is imported. As they say in Sept-Îles bars: “All the good stuff goes to Havre-St-Pierre…”
I think Canada’s natural resources have also created a lazy private sector which does little R&D or product innovation and generally does not invest in human capital compared to other developed countries.
It is difficult to product -innovate when you produce rock.
On the process side, oil and gas have always been active in R&D( fracking has halved the price of natural gas in 2 years and brought the shale gas political crisis all over North America and Europe). If you go up the food chain, aluminum smelters ( like ALCAN) always had large research program on both process and product innovation.
But the large (and ever increasing) foreign ownership leaves open the question of where the central-office functions will be performed, though the usual evidence has been, at least for manufacturing, that foreign-owned ( and presumably bigger) firms do more research than domestic one.
But it remains that most hard-rock mines are rather small and short-lived. Hard-rock mining creates and nurtures a culture of fly-by-night operations, not inclined to long-term thinking. And the harsh nature of the business attract a population not that inclined to dwell on the value of intellectual introspection ( see Texas Republicans, Alberta CP)
One wonders if Alberta and the rest of the west is better off leaving that shale gas underground until prices recover somewhat. I can’t imagine the royalties they collect on that resource being all that significant.
These resources are not infinite and at some point they’ll be exhausted. Little investment is made outside of these industries and the income from these industries is largely used for consumption. I think Canada will be a poorer country in the future because of this behavior.
Can a democratic government perform the role of responsible investor? Unless election cycles match asset maturity, investments will be chosen to win votes rather than returns. Better to hand the money out to the public, who might satisfy some real demand with it; or even better, to never have hamstrung development by collecting the rents in the first place.
Many nations are abundant in resources; unentangled resources are the true rarity. Governments throughout history have tended to view resources as nation property. Access and use are dictated, favors dispensed, and revenues exacted. A few get rich and the rest get nothing. Not Canada’s situation, perhaps, but one does wonder why the country with by far the greater abundance (compared to its southern neighbor), has never been seen to afford the same sort of opportunity to immigrants, investors and the rest.
Norway seems to be able to pull it off.
But Canada could indeed be be the Argentina of the future. Perennial exporter of natural resources ( living off our capital) and having just elected our first Peron…
Canada does seem to be drifting towards an Argentina style existence and I think abundant natural resources are more likely to promote authoritarian regimes. Another issue is that human capital matters a hell of a lot less in natural resource abundant countries then say a place like Singapore. This means deplete resources leaves a low-skilled population with little means of supporting themselves.
Costard, I think Norway, and even the CPP, are examples that prove endowments can work. They just need to be sufficiently arms-length from government meddling.
Steven Harper as Canada’s first Peron. That’s pretty funny.